Which of the following determines the size of the investment multiplier?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Marginal propensity to consume
The multiplier is 1 / (1 − c), where c is the MPC. Its size depends only on the MPC: the larger the MPC, the larger the multiplier.
NCERT (2026-27): “4.3.3 The Multiplier Mechanism … The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. Recalling that 10 and 0.8 represent the values of ΔI = ΔA and mpc, respectively, the expression for the multiplier can be explained as”
“where ΔY is the total increment in final goods output and c = mpc . Observe that the size of the multiplier depends on the value of c . As c becomes larger the multiplier increases.” |
